Stay the course

By Bob Powell

If there’s one message that the mutual-fund industry wants you to internalize, it’s this: No matter what happens in the markets, don’t stop contributing to your 401(k). It’s been a consistent message from the Investment Company Institute, the lobbying group for the mutual fund industry. It was the message of a Vanguard study released a few months ago. And it was the main message of a Fidelity Investments study released today.

Fidelity’s analysis of plan participants who held a Fidelity 401(k) plan for the past 10 years showed the following: Account balances rose 150% to $163,900 at the end of 2009 from $65,800 at the end of 1999. According to Fidelity, about three-quarters of that return was due to continued participation and employer contributions and about one quarter was due to market returns.

What can be learned from the above? Saving matters. Employer contributions matter. Prudent investing matters. But, with the exception of investing in things with guaranteed returns, don’t ever rely on the market for returns.

Saving matters — Fidelity’s analysis showed that these continuous participants had a median age of 51 and a contribution rate of 10.4%.

Employer contributions matter – Employers contribute upwards of 4% to a participant’s 401(k) according to various research on the subject.

Prudent investing matters – According to Fidelity’s study, roughly 32.5% of the average plan participant’s return came from market returns. Though positive, it could have been and should have been better, Fidelity said.

Indeed, Fidelity noted that 65% of its participants took on more risk than a corresponding age-based or target-date fund. And some took risk-taking to the extreme. Nearly one in two (47%) of Fidelity’s plan participants studied over the 10-year period invested 100% of their 401(k) in stocks in 1999.

And that means that it’s well within the realm possibility that given the performance of the Standard & Poor’s 500 stock index for the 10 years ended 1999 (it fell, even after including dividends, on average 0.9% a year) that some participants had less money in their account at the end of 10 years than they had contributed.

Going forward, the message seems clear, at least from the providers of 401(k) plans. Don’t stop saving. In fact, save at least 10% if you can. Take full advantage of your employer’s match, if you have one. Invest wisely: Don’t put all your eggs in one basket, especially the stock basket. And above all, be patient. Markets, as they did in 2009, do turn. And when that happens, everyone gets to confuse brains with a bull market again.

About The Retirement Blog

Robert Powell, the editor of Retirement Weekly, has been a journalist covering personal-finance issues for more than 25 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News. In the Retirement Blog, Powell keeps watch on the latest news and trends in retirement.